Complexity also adds to the danger that any one part of the hyper-financial system can bring down the whole. (...)
I can't count the times I've heard it said that we were no longer in danger of a 1929-type scenario because, precisely, today's financial system was more sophisticated -- risk was distributed, the multiplicity of instruments permitted hedging of a kind that guaranteed resistance to shocks and stability.
Now none other than the FT is breezily saying the opposite?
This October Discussion wound up with that as a "Key Lesson". "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
The Simplicity Rule A major rule should be taken into account: The market always tends to flow to simplicity. Complexity is generally costlier to both monitor and produce, and somehow in the long run, demand moves away from the complex in favour of the simple. New, elaborate contracts certainly attract people, but typically the novelty wanes. Operators will then try to satisfy their needs for protection by seeking the cheapest possible way. Complex products cost more to replicate. An optimal operator becomes cost conscious and avoids enriching the financial institutions when he can satisfy his interests more economically. This becomes noticeable with the life or death of listed financial instruments. It is the recipe for the survival of exchange contracts. This rule will be discussed in the study of exotic options.
A major rule should be taken into account: The market always tends to flow to simplicity. Complexity is generally costlier to both monitor and produce, and somehow in the long run, demand moves away from the complex in favour of the simple. New, elaborate contracts certainly attract people, but typically the novelty wanes. Operators will then try to satisfy their needs for protection by seeking the cheapest possible way.
Complex products cost more to replicate. An optimal operator becomes cost conscious and avoids enriching the financial institutions when he can satisfy his interests more economically. This becomes noticeable with the life or death of listed financial instruments. It is the recipe for the survival of exchange contracts. This rule will be discussed in the study of exotic options.
Very annoying, especially for those of us who looked at the complexity of risk and pronounced it dangerous and were shouted down by the likes of the FT.
